Shifts in Minneapolis tax base make 2022 more ominous for homeowners

The 5.35 percent property tax increase penciled in for 2022 at Minneapolis City Hall sounds like a better deal for homeowners than this year’s 5.75 percent, right?

Wrong.

Many city homeowners were greeted with a lower property tax bill this year despite the 5.75 percent increase. But little-reported shifts in the city’s tax base make 2022 more ominous for them. Hold on to your wallet.

First, the city’s tax base is stalling. Second, the outwash of the pandemic will shift 2022’s tax burden more toward homeowners. Third, there’s no hefty addition to the tax base in 2022 from the expiration of development districts, something that buffered this year’s tax bills.

Let’s do some review. An X percent increase in the property tax levied usually doesn’t translate to a commensurate increase in a homeowner’s bill. Growth in the city’s tax base — such as new downtown office towers or those apartments popping up like mushrooms in some neighborhoods — usually absorbs some of that increase. That’s partly why property taxes dropped this year for many homeowners, except for people like north siders whose homes were reassessed sharply upward.

A shift in assessments

But a shift not seen in years will govern next year’s taxes, the first to reflect the pandemic’s impact on city assessments. Over the past decade, homeowners have been buffered from the worst impacts of higher property levies, primarily because apartments doubled their share of the city tax base. The homeowner share of the city’s tax capacity was 56 percent in 2010. That dropped steadily to 47 percent for taxes paid this year. But this year’s assessment — which will govern next year’s taxes — tells a different story. The homeowner share of the city’s tax base reversed course, meaning that residential taxpayers will account for 49 percent of the tax base.

Most everything is different in this year’s assessment. The city’s aggregate market value rose only 2.2 percent in 2021, less than half of the previous year. That slowdown contrasts with an average annual increase of 8 percent in the previous decade. But another factor worsens that. Minnesota law translates a property’s market value into tax capacity, to the benefit of homeowners and detriment of apartment owners and their tenants. It also penalizes commercial taxpayers.

The bad news is that the city’s tax capacity barely budged in the 2021 assessment. That’s especially jarring after annual increases averaging 8.6 percent for the last 10 years. And there’s a shift within that new stasis; steadily rising home values mean the residential share of that tax capacity has grown while the commercial sector share shrinks.

That means that homeowners will bear the brunt of the budgeted levy increase next year. The greatest pain again will be felt on the city’s north side, which can least afford it. Assessments there have lagged behind that area’s booming home prices. Assessors are now responding. The assessment for a median-value home in the Fourth Ward, roughly equivalent to the Camden area, jumped by 17.3 percent over the past two years. Near North’s Fifth Ward suffered a 26.7 percent assessment increase.

Gloomy outlook could persist

The gloomy outlook for homeowners could persist into future years. That’s if decisions by major tenants such as Target, which plans to pull out of City Center, spread across downtown, where core office buildings already face a 22 percent vacancy rate. Already, building managers report shorter-term lease renewals as tenants hedge their bets against a wholesale change in where their employees work.

One bright spot in the tax base is the decade-long spurt in apartment construction, which has buffered homeowners. But it may be winding down. That’s significant because the $1.5 billion in new apartment value added in the last two years was more than three times that for new single-family home construction. That made new apartments a significant factor in absorbing more City Hall spending. Some of that boom was spurred by new density allowed in the city’s 2040 plan; some represented developers rushing projects through before the city’s new inclusionary zoning requirement for apartments kicked in. Now some in the industry warn that once that those projects finish, talk of imposing rent control will shift the apartment construction boom to bust.

The uncertainty posed by downtown’s office vacancies is spilling over elsewhere. The retail sector where those employees shopped and ate lunch lost 5 percent of its property value in the latest assessment. The assessment against the city’s hotels dropped by 28 percent because they’re valued on the basis of revenues. Hotel occupancy last year nationally was the industry’s worst since the Great Depression. Minneapolis hotel revenues plunged 78 percent, the worst among comparable Midwestern cities.

Ways to rethink the 2022 levy

The city’s stalled tax base and persistent unemployment among taxpayers who worked in pandemic-hit industries signal a need to rethink the 2022 levy. One option is backloading it in the city’s five-year financial plan. Although that likely would increase taxes in out years, the economy may then be in better shape. Austerity measures imposed by City Hall during the pandemic may need extension. Normally, some cushion against tax hikes could be supplied by drawing down budgetary reserves but the city’s $27 million settlement with the family of George Floyd will limit that dampening effect.

That’s why we need renewed conversation and hard choices on what homeowners and the city can afford in 2022.

Steve Brandt is a retired Star Tribune reporter, and a candidate for the Minneapolis Board of Estimate and Taxation.

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